Spanish 10 Year Yield Back Over 7% Following Ugly Bond Auction

Instead of sticking to selling short-term, LTRO covered debt, Spain was so desperate to show it has capital markets access that this morning it tried selling bond due 2014, 2017 and 2019 with a maximum issuance target of €3 billion. It failed to not only meet the target, but to price the €1.074 billion in bonds due 2017 at anything less than an all time high (6.459%) as a result sending the entire curve blowing out wider, and the 10 Year above the critical 7% threshold again, for the first time since the June Euro summit, whose only function was to give a positive return for the fiscal year to such US pension funds as Calpers and New Year. In summary: Spain sold 2.98 billion euros of short- to medium-term government bonds on Thursday in a sale at which borrowing costs rose and demand fell. The average yield at a sale of 1.07 billion euros of five-year bonds rose to 6.46 percent compared with 6.07 percent at the previous auction of the debt last month. Investors' bids were worth 2.1 times the amount offered for the five-year paper versus 3.4 times at the last auction, and 2.9 times for the seven-year bond. The average yield at the seven-year sale rose to 6.7 percent from 4.83 percent.

More from Reuters:

Spanish government bond prices and the euro fell, while European stocks trimmed gains, after a bond auction on Thursday at which Spanish borrowing costs rose.

Spain sold 2.98 billion euros of two-, five-, and seven-year debt, near the upper end of its target range, with average yields rising across the board compared to previous auctions.

Ten-year Spanish government bond yields extended a rise that had begun even before the auction and were last up 7.3 basis points at 7.03 percent. Five-year yields were up 10 bps at 6.44 percent.

German Bund futures pared some losses after the sale, and last stood down 11 ticks at 145.23.

The euro fell to a session low of $1.2263 on the EBS trading platform, down from around $1.2283 before the Spanish auction.

And the knee jerk response to the auction.

HARVINDER SIAN, STRATEGIST, RBS, LONDON

"The tails were pretty large but I guess that's correlated to the fact that issuance sizes were up. There was a greater fear around this market with regards to the bonds that they'd selected.

"But we had enough of a discount from the way that the market traded into the auction so a lot of those risks would have been mitigated by the price action.

"Now that's out of the way the market can probably stabilise a little bit but the supply is never far away even though we're heading into a lull in August. The general context is that these guys aren't getting much love from the bond market."

MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON

"They sold what they wanted to sell, that's about the only good thing about it. The covers are distinctively weaker. They had to sell about 40 percent in the two-year which basically tells you there isn't much demand for the longer-dated ones."

"The tail is just not good."

"Yields should be 150-200 basis points lower to make it somewhat more sustainable. We shouldn't be surprised that there aren't many people turning up. We're still waiting for the bank bailout to be finalised and there's no guarantee that Spain itself won't need a bailout at some stage so why would people want to be charging in right now?"

ERIC WAND, RATE STRATEGIST, LLOYDS BANK, LONDON

"They managed to get it away, which is a good sign. The bid/covers are slightly softer than people probably would have liked given the concession we had going into the auction. It's not as strong as it could have been but given the circumstances that doesn't particularly surprise me. Spain obviously can still fund but matters are getting increasingly worrying in peripheral products - there's definitely divergence between where periphery is going versus semi-core.

"The positive is that they managed to sell the 3 billion euros but the downside is bids are not as concentrated as last time."